Markets rebound after Cyprus reaches last-ditch bailout deal

European shares rebounded and safe-haven German bonds fell early today after Cyprus clinched a last-ditch deal with lenders to bail out the debt-ridden island and avert a collapse of its banking system.

In the early hours of Monday morning Cypriot policy-makers agreed a deal with the European Union, the European Central Bank and the International Monetary Fund to shut down its second largest bank and inflict heavy losses on uninsured depositors, including wealthy Russians, in return for a 10 billion euro ($13 billion) bailout.

Without the agreement the ECB said it would have cut off emergency funds to the banks, triggering a meltdown of Cyprus’s banking system and potentially pushing the small country out of the euro currency bloc.

The Cyprus deal, however, was unlike previous peripheral euro zone country bailouts, which have protected bank deposits.

Traders said to expect risk premiums, which had been falling, to increase again.

Early on Monday, however, markets reacted with a sense of relief that the eurozone had managed to douse the flames of the latest fire to threaten the region’s financial system.

Europe’s top shares rose 0.8%, recovering most of the losses from their worst weekly performance since mid-November last week on concerns that problems in Cyprus could spread to other struggling euro zone members.

“I am wondering whether this slightly more moderate response by the market is a reflection of the fact the trust (in eurozone policy makers) is now gone,” said Justin Haque, a broker at Hobart Capital Markets, though he expected equity markets to keep rising into the extended Easter bank holiday break.

“This week is a short week and the end of the quarter, so there is going to be a massive amount of window dressing,” he said.

Yields on debt in peripheral nations such as Italy and Spain, which fall when the economic outlook brightens, were slightly lower.

In the currency market, the euro, which has largely held its ground this week despite the turmoil in Cyprus, was again little changed at just above $1.29.

he dollar fell 0.4% against a basket of major currencies, while gold, favored by tension-sensitive investors, was just down, but still near a one-month high.